As part of its Chapter 11 reorganization Bally Total Fitness of the Mid-Atlantic assumed a lease with Friday Investment, which had originally included a guaranty by Bally Holding. When Bally Mid-Atlantic later defaulted, Friday Investments sought to enforce the guaranty against Bally Holding. Bally asserted that while the lease had been assumed, the guaranty was discharged.
In a divided opinion, the majority of held that under North Carolina law a guaranty is a separate contract from the underlying obligation, Tripps Rests. of N.C., Inc. v. Showtime Enters., Inc., 164 N.C. App. 389, 391, 595 S.E.2d 765, 767 (2004), with “[t]he strict independence of the two separate contracts is “not affected by the fact that both contracts are written on the same paper or instrument or are contemporaneously executed.” There remained, however, a genuine issue of material fact whether the guaranty was “required to be maintained” by the assumption or discharged.
The dissent disagreed that there was any ambiguity and that the guaranty was “required to be maintained”, with the lease and guaranty being a single contract.
This case does have implications beyond commercial leases, as co-signors in consumer leases and loans should similarly be able to assert that the discharge of their guaranty in a bankruptcy leaves the underlying contract still extant.
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